Is Inequality Good for Your Life Chances?

The New York Times today features an excerpt from a new book by one of their writers, Eduardo Porter, called “The Price of Everything: Solving the Mystery of Why We Pay What We Do,” coming out in January 2011 from Portfolio Publishers. Income inequality is the theme and the message is an old and complicated one: As economies grow, inequalities in income tend to increase, but too much inequality then hampers the very social mobility that is required for economies to continue growing. Although Porter does not go into this in the excerpt, we can note that Marxism arose in reaction to the inequalities of capitalism in the 19th century, but then it turned out that the Marxian solution stifled the kind of competition and opportunities for personal economic advancement that provide the incentives for an entire society to be lifted out of poverty. At the same time, too much inequality also stifles those opportunities, so a societal balance with respect to inequality seems necessary for long term economic progress. The importance of inequality is illustrated by Porter with respect to immigration:

Despite the great danger and cost of crossing the border illegally into the United States, hundreds of thousands of the hardest-working Mexicans are drawn by the relative prosperity they can achieve north of the border — where the average income of a Mexican-American household is more than $33,000, almost five times that of a family in Mexico.

In poor economies, fast economic growth increases inequality as some workers profit from new opportunities and others do not. The share of national income accruing to the top 1 percent of the Chinese population more than doubled from 1986 to 2003. Inequality spurs economic growth by providing incentives for people to accumulate human capital and become more productive. It pulls the best and brightest into the most lucrative lines of work, where the most profitable companies hire them.

And the subject of immigration is a reminder that a new US Congress is about to be sworn in, with expectations of a new, harsher policy approach to immigration. Will that be good or bad for inequality and the economy?